The United States and Japan will step up their defence cooperation to deal with the threat from nuclear-armed North Korea as tensions in East Asia remain high, officials from the two allies said on Thursday.

Better outlook for home builders: Treasury

Residential builders, particularly in Western Australia and NSW, are cautiously optimistic about the outlook for the construction sector, a treasury business survey shows.

The department's quarterly economic round-up released on Thursday noted the conversion time from inquiry to sale for new residential developments had noticeably increased over the first half of 2012.

Despite this, the outlook for the residential construction sector "was cautiously optimistic, although this varied between states", the document, compiled from a treasury business liaison program, said.

There was a generally favourable view of conditions in WA and NSW as a result of better market fundamentals and, in NSW, recent changes to planning policy.

But treasury again found uncertainty about the global outlook was creating a significant drag on the domestic economy, while the high Australian dollar remained a key concern in the manufacturing sector and was increasing competitive pressures.

"In response to this pressure, some contacts reported a shift in their business model away from domestic manufacturing to leveraging their strong brand and refocusing their activities towards design, distribution and retail," the department said.

Mining companies were looking to reduce costs in their operations as a result of recent falls in global commodity prices, although resource investment decisions were taken over a longer-term horizon where the outlook remains positive, it said.

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"However, producers observed that prices as low as those seen in August would induce a reduction in global supply from high-cost producers if sustained for more than a few months," it said.

Separately, a treasury analysis has found that placing any restriction on foreign investment would reduce the wellbeing of Australians.

It says Australia has had a long history of foreign capital inflows because of an abundance of investment opportunities, particularly in the resource sector, that have not always been met by domestic funding.

Such foreign inflows have enabled capital, incomes and wages to build up.